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| A signboard directs customers to the personal loan service section at a commercial bank in Seoul, June 22. Yonhap |
Eight out of 10 customers borrowed money on floating rate
By Yi Whan-woo
Bank customers who took out loans are under mounting pressure to redeem their debt due to the growing possibility of the Bank of Korea (BOK) taking an unprecedented "big step" on the key interest rate.
Almost eight out of 10 customers who borrowed money in Korea took out the loans on a floating interest rate, which tracks the benchmark interest rate. This means the more the base rate increases, the bigger the repayment burden will be for the borrowers who opted for loans on a floating interest rate.
A "big step" refers to a hike in the policy rate by half a percentage point, which is unprecedented in Korea. A need for such a hike was brought up in the market only recently as the BOK's multiple quarter percentage point increases in the past months were regarded as being insufficient to tame soaring inflation.
Under the circumstance, data released by the BOK on Wednesday showed that 77.3 percent of borrowers nationwide took out loans on a floating interest rate as of April. That is the highest rate seen since March 2014 when 78.6 percent of borrowers took out loans on a floating interest rate.
High inflation expectations
On the same day, the BOK announced that consumer expectations for inflation grew at the fastest pace in more than 10 years to 3.9 percent in June.
The reading was up from the previous 10-year high of 3.3 percent in May.
The inflation expectation is used as a reference to determine the future price of goods, wages and other factors that, accordingly, influence real inflation in the future.
Consumer price growth hit a 14-year-high of 5.4 percent in May and it could even surpass 6 percent in the coming months, according to several economists.
"Whether the 'big step' will be taken or not will depend on the consumer price index for June," a BOK official said, noting that the index is scheduled to be announced next week.
"It is believed that many rate-setting board members will support the idea of a 'big step' if the June inflation rate turns out to be over 6 percent," the official added.
The upcoming rate-setting meeting is slated for July 13.
Shinyoung Securities analyst Cho Young-koo also speculated that a "big step" is possible, saying, "The inflation expectation in June can certainly lead to an actual inflation rate in the 6 percent range in July or August."
If realized, the "big step" hike can add to snowballing household debt, because a significant amount of that debt comes from mortgage loans that were mostly taken out on a floating interest rate.
The benchmark interest rate currently stands at 1.75 percent, while the five major commercial banks offer mortgage loans on a floating interest rate of 3.63 percent to 5.826 percent.
Household debt amounts to 1,752.7 trillion won as of March. The interest burden is estimated to increase by 6.77 trillion won ($5.2 billion) if the BOK hikes the policy rate by 50 basis points on July 13.
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